Bruynseels et al.
What is the Sarbanes-Oxley Act (SOX)?
This 2002 Act defines independence strictly through financial or family ties, which the authors argue is too narrow.
What is Tobin's Q?
This common proxy for firm value is found to increase with board size for complex firms but decrease for simple firms.
What is the definition of a “busy” outside director?
An outside director who holds 3 or more board directorships.
What does it mean that boards are endogenously determined?
Board structure is chosen based on firm/CEO/shareholder conditions , so board performance reflect selection, not causation.
Main governance mechanism studied in Klein (2002)?
Board independence and audit committee independence
What is a "friendship" tie?
This specific type of social tie, often originating from leisure or country clubs, is found to be detrimental to audit committee oversight.
What are firm size (sales), diversification (segments), and leverage?
Complex firms are defined in this study by these three characteristics that increase a CEO's need for advice.
When is a firm classified as having a “busy board”?
When a majority of outside directors are “busy”
CEO turnover is more sensitive to performance when the board is more _____.
Independant
What accounting measure does Klein use as a proxy for earnings management?
Abnormal accruals
What are employment and education (advice) ties?
Unlike friendship ties, social connections formed through these two professional avenues do not hamper the quality of monitoring.
What are R&D-intensive firms?
These types of firms benefit from having more "insiders" on the board due to the importance of firm-specific knowledge.
Name two governance/performance outcomes that are worse in firms with busy boards.
Lower market-to-book, lower profitability, weaker CEO turnover–performance
What is the difference between an equilibrium vs out-of-equilibrium explanation for board structure and performance?
Equilibrium: firms choose boards optimally; correlations may not be causal.
Out-of-equilibrium: ds;frictions prevent optimal boar changes in boards can affect performance.
Simultaneous Answer:
Write down the governance threshold that Klein finds most important for reducing earnings management.
A majority of independent directors (> 50%)
What are going-concern opinions and internal control weakness reports?
In firms with friendship ties, auditors are less likely to issue these two warning signals when problems exist.
What is U-shaped?
This geometric shape describes the overall relation between Tobin’s Q and board size across the entire sample.
What happens to stock prices when (a) a busy outside director departs, and (b) a director becomes busy after taking an additional seat?
(a) Positive abnormal returns when a busy outside director departs.
(b) Negative abnormal returns for the director’s other firms when the new seat makes them busy
the stock price reaction to a CEO firing should be negative if the CEO is fired based on _____ information, but positive if fired based on _____ information.
Private information → negative reaction
public information → positive reaction.
A company increases the percentage of independent directors on its board.
What is the most likely effect on earnings management, an increase or decrease?
Decrease - improves board monitoring and reduces earnings manipulation
What is substantive independence?
This is the paper’s central paradox: audit committees may satisfy legal independence rules while lacking this deeper form of independence from management.
What are transaction costs?
The authors suggest these costs (e.g., staggered boards or implicit contracts) prevent firms from quickly adjusting to their "optimal" board size.
Observe Firm X:
Year 1–2: performance improves a lot
Year 3: board independence falls (more CEO-friendly appointments)
Year 4: performance drops sharply and the board adds 2 independent directors
Explain why this pattern is not contradictory.
independence can decline over a CEO’s tenure (after success), but after poor performance the probability of adding independents rises.
Two firms have the same stock performance drop this year.
Firm A: Board has 9 directors, 7 outsiders. The 7 outsiders have board seats: [4,4,3,2,2,1,1]
Firm B: Board has 9 directors, 7 outsiders. The 7 outsiders have board seats: [2,2,2,2,1,1,1]
Which firm is more likely to fire the CEO after poor performance?
Firm B, because Firm A has a busy board and the paper finds CEO turnover is less sensitive to poor performance when outside directors are busy.
Board structure:
-2 independent directors
-2 former company executives
-1 CEO's former colleague
-1 industry expert with no ties to the company
Q: What is the main governance problem here?
Board lacks a majority of independent directors - weakens monitoring and increasing risk of earnings management